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Bolivia's state airline catapults to market leader

CARLOS VALDEZ, Associated Press

LA PAZ, Bolivia (AP) — In just three years, Bolivia's state airline has pushed aside private carriers, bucking an international trend toward privatization while becoming the leader in domestic flights for a poor Andean country where flying remains a luxury.

Boliviana de Aviacion has abolished first class and sells all seats for the same low prices, marketing the flights with a socialist stamp in keeping with President Evo Morales' insistence that "all are equal."

The story of how BoA has managed to fly high while governments elsewhere have been privatizing or bailing out their state-run carriers reflects shrewd timing in filling a void in the market, as well as cut-rate fares that have attracted a growing clientele.

BoA now controls about half of Bolivia's domestic air travel market. As its routes and earnings have grown, it has announced plans to expand its fleet by buying as many as six new Embraer 190 planes from Brazil.

"BoA has been an interesting bet on the government's part," said Armando Mendez, an analyst and former president of Bolivia's Central Bank. "Little by little, it has captured more acceptance and it competes with the private company AeroSur."

Mendez said BoA seems to be bringing healthy competition to Bolivia, where five airlines battle in a market of about 1.5 million passengers a year. The airline has successfully filled a gap left by the 2007 failure of Lloyd Aereo Boliviano, a former state-run company that went bankrupt after failed attempts to privatize it.

The airline has also tried some creative marketing, including teaming up with a lingerie store last month to offer an in-flight fashion show featuring Colombian and Bolivian models parading down the aisles of a Boeing 737 in revealing underwear.

"Let yourself get carried away," BoA urges potential customers.

BoA won over clients by offering two-for-one deals during its first year in 2009. Since then, it has kept fares low, and its main competitor AeroSur has accused BoA of unfair pricing tactics and subsidies.

While AeroSur charges about $245 for a round-trip adult ticket between the cities of La Paz and Santa Cruz this month, BoA charges about $190. It also offers discounts for the elderly and children.

The airline has been a rare success among various attempts by Morales' government to administer state-owned enterprises.

Since taking office in 2006, Morales has increased government revenues by declaring Bolivia's natural gas deposits national patrimony and securing a greater share of royalties for the state. While boosting Bolivia's income, the tactic has also largely discouraged foreign investment.

Bolivia similarly has a wealth of minerals including tin and silver, but mining production has been declining and several small government-run companies haven't managed to reverse the trend.

The country's lithium riches have gone untapped, largely because of Morales' insistence that any extraction partner also manufacture in Bolivia the lithium batteries expected to power the electronic cars of the future.

BoA is an exception in part because air travel is growing in the country as well as in Latin America overall.

Using a fleet of six leased Boeing 737s, the airline now offers international flights to Buenos Aires, Sao Paulo and Lima, and has plans to add Caracas and Havana.

The number of passengers flying in Bolivia has increased 35 percent in the past six years, authorities say.

Airlines' operating profits grew to $518 million in Latin America during the third quarter of 2011, up from $513 million a year earlier, according to the International Air Transport Association. That contrasted with declining profits elsewhere.

"Right now Latin America is very, very hot in the sense that it's very rapidly growing," said Helane Becker, an airlines analyst at Dahlman Rose & Co. in New York. "You can't get seats on flights, the pricing has gone through the roof and I think the government sees that."

A new state-run airline launch is rare these days, with privatization far more common.

Italy's national carrier Alitalia was privatized in 2008. Greece sold off debt-ridden state carrier Olympic Airlines in 2009.

"State-run airlines are becoming less common worldwide as governments try to get out of the taxpayer costs and union politics of running an airline," said Ray Neidl, an analyst at Maxim Group LLC in New York.

But Latin America's leftist governments have bucked that free-market trend.

Argentina's government expropriated Aerolineas Argentinas in 2008 as it teetered on the edge of bankruptcy. It spent about $760 million on the company during 2011, much of it to cover losses from unprofitable routes and the burden of frequent strikes.

In Venezuela, President Hugo Chavez's government has subsidized Conviasa since its 2004 launch and this month announced plans to buy six new planes.

In Bolivia, Morales' government initially spent $25 million to launch BoA in 2009. Vice President Alvaro Garcia said last month that the airline lost $6 million in its first year, "but in 2010 it stabilized and achieved earnings of more than $4 million, aside from the payment of $34 million in taxes."

Economy Minister Luis Arce said that between September 2010 and September 2011, the company's earnings totaled about $90 million, while its operating costs were about $78 million.

Roca fled into exile in the United States in 2010 after Bolivian authorities accused him of illegal enrichment and began investigating his fortune. He denies wrongdoing.

"The government wants to take over the airline market, and that involves sinking AeroSur," Roca said last year.

Bolivia's state transport authority ruled against AeroSur SA in a 2009 complaint, saying there was no unfair competition.

Government officials defend BoA's approach saying it's aimed at creating a bigger state role in the sector. BoA manager Ronald Casso has said the carrier needed to aggressively price its fares to compete with AeroSur's virtual monopoly.

BoA became the top domestic carrier in 2010, while AeroSur has compensated for domestic losses with its international flights. Two other private airlines, Aerocon and Amaszonas, fly in Bolivia, as well as the military-run airline Transporte Aereo Militar, or TAM.

For BoA, the upward trend looks set to continue. Its number of passengers grew 21 percent in the first 10 months of 2011 compared to the same period in 2010.

Morales last month proposed to buy six Embraer 190 jets during a meeting with Brazilian President Dilma Rousseff in Caracas. Two planes would be delivered yearly between 2013 and 2015.

But Mendez warns that investing so much could be misguided. Each jet costs an estimated $35 million.

"The recommendation we make to the government is that while BoA is clearly a company that's growing, don't buy planes," Mendez said. "The business is in leasing them."